I love the part where Wyatt Cenac says to the Nevada MBA guy, “Sucks to find out your dad’s a deadbeat, huh?”
No, no, it’s ok, see, because the home buyers are rich Californians who spent more on a house than I ever hope to. :rolleyes:
This is not a “poor banks” rant. In general I find the behavior of money lenders in the modern age to be disgusting. However, that doesn’t mean that I can’t find it distasteful when someone walks out of a contract out of ‘choice’ not ‘necessity’, while at the same time complaining about wanting to do the right thing.
Right . . . ‘not loan to anyone’ was hyperbole based on the equally implausible scenario that every person could be expected to walk away from loans. But, you raise a good point, that this is just another behavior that is going to shape the economic and lending climate in the future, perhaps for the better. And, from an abstract perspective I might agree with that, though I think it’s sort of a separate issue from the OP.
Are you serious? The house will go into foreclosure, the bank will then sell the house for significantly less than what the family owes on it, then the bank will sue them for the difference. After they obtain a judgement against the family, they have the power to garnishee their wages.
That’s assuming they can prove they have the correct paper on the loan. And whatever difference they think they could recoup would probably be eaten by court costs. Multiply this family’s case by a couple of hundred, and I think the purported owners of the loan would likely decline to pursue it.
That’d be my question as well. So they walk away. Then what?
They are out any type of down payment they made on the house, their credit is marred for quite a while, no one is going to give them another loan, so what do they do? Rent for the next 10 years?
Has this ever happened?
If I obtain a loan from a bank with a house as collateral, and surrender that collateral in lieu of repayment, what legal theory allows the bank to extract from me the difference between the unpaid portion of the loan and whatever the bank decides to sell it for?
Well, I probably wouldn’t like this person very much myself. She does come across as a whiner in the story. She is a CPA complaining about her own bad investment.
But, in the end, she and the bank signed a contract and the bank is going to get a house that they were certain was worth more than it turned out to be, as agreed. Both of them made the same mistake together, except that banks get bailed out by us when they screw up. When regular people screw up we are supposed to suck it up and not only live up to our contractual agreement but also some higher moral requirement? That makes business agreements between banks and humans kind of lop-sided.
This is something that has been bugging me about this whole meltdown. Paul in Qatar and Gyrate have touched on this.
If all of these institutions that caused this crisis in the first place get to just walk away from their obligations and get a do-over because they made the “business decision” to do so, well, so should I.
If I am struggling to pay a large mortgage and getting nowhere and I see that I can rent the same amount of space in a comparable neighborhood for less then I should be able to make the business decision on the behalf of my family to walk away from my mortgage. Naturally, I will be glad to stay in my current home for the good of the country but will require a substantial bailout to do so.
Fuck these banks, they have nothing close to a leg to stand on here.
You are incorrect.
The woman in the OP’s story is in California. California is a “non-recourse” state, meaning that the lender can take the house back, but cannot sue for the difference in value between the original purchase price and the current value of the house.
I actually made a long post about this issue back in January, making reference to a research paper on the issue by Brent White, a professor of law at the University of Arizona. You can read the post here, if you’re interested.
Just by the way, did you see the article in the New York Times about Spanish mortgages? It seems that under local law, bankruptcy will not protect a borrower!
That is the bank gets the house and can garnish your wages for the rest of your life. Makes you realize why we have bankruptcy!
Actually, it is apparently possible in some states for this to happen. If my reading is correct, one of the reasons that house closing costs are higher in California and some other states is partly because of the non-recourse law. Also, even if they sue you, declaring bankruptcy would take care of it once and for all. Non-recourse laws simply allow you to walk away without doing that.
It is worth noting, though, that even in states like California there are some exceptions to the non-recourse law. For example, if you leverage the value of your house to take out a cash loan, or a second mortgage on the same property, you can be a sued for the amount you borrow in those cases. But not for the original loan amount.
Another thing worth noting is that corporations make the same sort of decision that the woman in the OP made all the time. Check out how corporate America makes decisions about underwater mortgages, or their commercial big-business equivalent, in this story from the Wall Street Journal.
So, Tishman Speyer and their partners paid $5.4 billion for this property, it’s now only worth about $1.8 billion, so they’re essentially stopping payment on the mortgage and handing the keys over to the bank.
I assumed the reference was to California, via **mozchron **and John Mace’s posts.
I don’t see any moral obligation to continue paying a mortgage; it’s a business transaction, and if a rational analysis shows that breach is the most sensible course, then breach away. The real penalties for breach are significant enough that heaping moral ordure on top of that is just obnoxious.
The bank isn’t going to apply a moral calculus in deciding whether or not to pursue any of the options and remedies available to it under the contract; why should you? It’s not the bank is some sort of neofeudal liege lord to which one owes honorable fealty. Although I think many bankers would like us all to believe thus.
Yep, that’s exactly the point made in the article i mentioned above. I really think that anyone interested in this issue would find it fascinating reading.
It’s 54 pages, but it’s a pretty easy read, and has lots of very interesting information and argument.
Assuming the borrower has only one mortgage, the house will likely stand as collateral and thus by surrendering the home through foreclosure, the borrower’s debt is fully discharged.
If they have a second mortgage, however, that second mortgage becomes an unsecured loan once the foreclosure takes place. The lender that holds the second mortgage can garnish wages and do all sorts of other shit to get their money.
Wages are dropping. Deciding to stay and pay a lot more than the home is worth is a bad economically for the family. It could hurt them for 20 or 30 years. Leaving is a wise business decision.
People do feel a moral obligation to living up to a contract. Banks have no moral compass, they are corporations that exist to make money. All the moral and ethical principles are on the back of the home owner. Banks don’t care.
Actually, isn’t that part of the point?
Part of the current crisis is attributable to the fact that banks were giving loans to people who should never have had them. In some cases, loan officers were encouraging mortgage applicants to lie about their income or assets.
Banks were also, according to the article i linked above, making loans based on excessively optimistic views of the future housing market, and so were failing to make sure that there was sufficient equity to cover themselves in the case of default. If the mortgage contract provides that the house will be surrendered in the event of default, then the bank is at least partly to blame if it lends out more money than it is likely to get in a repossession.
The problem is that people nowadays see their house as an investment and not as it’s original purpose: as a damn place to live!
Let my house depreciate, I don’t care. I’m here because my house is place to live, not a chip to trade in when the value is high. We’re not selling this house so the price could be anything it wants to be
That is an excellent point. If I can walk out of a loan and turn around and buy the property (or a comparable one) back from the bank after foreclosing and come out significantly ahead, then why the heck wouldn’t I? It’s all about weighing options.
What gets under my skin about this whole thing is, as I said, that the woman’s perspective and language feels very apologetic and remorseful. It plays for emotional sympathy like we’re supposed to ‘side’ with her. This whole mortgage issue has become one in which politics, economics, ethics, and morals have become deeply entangled in the public discourse. No one seems able to say, “I’m walking away from my mortgage,” without saying or implying, “because the bank did me wrong.”
I don’t know this woman, or how fleeced she was or wasn’t by her lender and/or the lending atmosphere or whatever. I just don’t particularly have a lot of empathy for her ‘plight’, and a plight is exactly how her story was framed.
I think there’s a moral difference between signing something that says
“I agree to do X. I understand that if I fail to do X, the penalty is Y”
and something that says
“I agree that I will either do X or accept penalty Y.”
Which of these kinds of things is the typical mortgage contract?